Market update - October 2017

Global markets performed strongly in October as synchronised global economic growth continued. Japanese Prime Minister Shinzo Abe achieved a solid victory in a snap election over the month, fueling investors’ expectations of continued monetary easing by the Bank of Japan. This led to the Japanese Nikkei 225 Index rallying 8.2% over the month. In China, President Xi Jinping further solidified his grip on power during the 19th National Congress of the Communist Party. Late in the month, the European Central Bank announced a 9-month extension to the Quantitative Easing program at a tapered rate of €30 billion bond purchases per month, starting from January 2018.

The US ISM Manufacturing Index which monitors employment, production, inventories, new orders and supplier deliveries of 300 manufacturing firms in the US rose to a 13-year high over the month of September, indicating a strong economic growth. However, despite a strong recovery of the US economy and labour market, low inflation has been the ‘biggest surprise in the US economy’ this year according to Federal Reserve Chair Janet Yellen. Late in October, the US Senate announced that they had achieved significant progress on their proposed $1.5 trillion tax cut plans.

In Australia, the High Court disqualified Deputy Prime Minister Barnaby Joyce from Parliament due to his dual-citizenship status, leading to the government losing a one seat majority. Against the backdrop of increased political uncertainty and lower interest rate expectations, the Australian Dollar fell by 2.3% against the US Dollar over the month. Inflation continues to miss expectations, as the September quarter inflation came in at 1.8% year-on-year, lowering expectations of an interest rate increase by the Reserve Bank of Australia in the near term.

The investment returns of the major markets for one month, one quarter, financial year to date and one year to 31 October 2017 are summarised below.

Market Performance - 31 October 2017 Month Quarter FYTD 1 Year
Australian Equities 4.0% 4.8% 4.8% 15.9%
Australian Property (Unlisted)* 0.5% 2.9% 3.3% 12.3%
Australian Property (Listed) 2.2% 4.4% 4.2% 8.6%
Global Listed Property (Heged into AUD) 0.2% 0.5% 1.5% 7.9%
Overseas Equities (Hedged into AUD) 2.7% 5.6% 7.2% 24.2%
Overseas Equities (Unhedged into AUD) 4.3% 8.9% 7.1% 22.7%
Emerging Markets (Unhedged into AUD) 5.9% 9.8% 11.9% 25.9%
Australian Bonds 1.1% 0.8% 1.0% 1.6%
Overseas Bonds (Hedged into AUD) 0.5% 1.0% 1.4% 1.9%
Cash 0.1% 0.4% 0.6% 1.8%
Australian Dollar vs. US Dollar -2.3% -4.0% 0.0% 0.8%

Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays

Australian equities ended the month notably higher with the S&P/ASX300 Accumulation Index up by 4.0% over the month, largely driven by strong performance of the Energy sector following strong gains in Crude Oil prices (up 7.2%). Small Cap stocks (6.0%) outperformed the broader market, while Large Cap (3.5%) stocks underperformed. IT (8.4%), Energy (up 6.4%) and Health Care (5.5%) outperformed, while Property Trusts (2.2%) and Telecommunication Services (2.4%) were the worst performing sectors.

The MSCI World Index ex-Australia (hedged into AUD) rose 2.7% over the month. The Australian dollar depreciated against most developed market currencies in October, which resulted in a return for unhedged overseas equities of 4.3% (in AUD). In developed markets, Japan (5.6%) and Germany (3.0%) outperformed the broader market, while Switzerland (1.3%) and the UK (1.6%) underperformed. The MSCI Emerging Markets Index (5.9%) outperformed unhedged developed markets.

The Australian and global bonds delivered pleasingly positive returns over the month.